In short–latency equals losses, but speed equals profits. Speed is often the key factor in modern financial trading. It’s all about getting there first. This is usually the recipe for success in financial markets, but it especially goes for high-frequency trading (HFT).
HTF revolves around employing computer algorithms to make trading faster than it’s humanly possible–literally. HTF became a buzzword a few years back when people realised that some traders could see when someone else was about to buy a stock. Then, they’d swiftly sweep in, buy it before them, and sell it at a higher price. The beauty of it? All of that goes down in the fraction of a second between order placement and order confirmation.
Speed as a Tool for Financial Trading
Various methods allow traders to measure the advantages in several ways, literally in fractions of seconds. It’s what allows high-frequency traders to achieve good results. One way is to be as close as you can to a computer that matches trades on the financial exchange of your choice.
To an untrained eye, the speed of communication on the internet appears to be instantaneous. But, even though we can’t see it, data reaches the nearest point first before it reaches further points.
In HFT, taking advantage of proximity is dubbed ‘co-location.’ It gives traders (their trading apps, more precisely) key access to market data nanoseconds before those at a further distance gain access to the same data. This allows the programs to act decisively.
Similarly, traders utilise the advantage of fibre-optic cable connection to gain an extra edge, as such cables offer a faster exchange of data between an exchange and its traders. A seemingly insignificant factor like that can be of vital importance.
The principle is pretty straightforward–the straightest cable covers the shortest distance between point A and point B. To take even more advantage of the vitality of speed in financial trading, some HF traders went so far to pay telecommunication companies to lay cables straight through mountains.
Dark pools are another ‘weapon’ of HFT. A dark pool is a private exchange that lets traders deal anonymously. Data is the most precious commodity in any market. Because of that, it’s no surprise traders guard it but also covet it. Not everyone has access to dark pools. The public can’t access them. But, adages are always right when they tell us that we are not capable of keeping secrets, at least not all of us. So, sometimes, these dark pools leak. Some shrewd (or dishonest) traders use such leads to make greater gains. Again, the key is to act fast on those leaks.
Staying on Top of The Game
Be you a regular trader or an HFT, it’s important to be ahead of the game. But, in the realm of short term or day trading, the fast-changing positions of currencies, bonds, shares, and stocks can make all the difference. Traders can play those changes to their advantage. To be good at it, a trader must develop an instinct for which way the wind blows and learn how to keep their fingers on the pulse of the market.
To make sure they’re always on the right track, traders need to stay updated by following reliable specialist news sources such as LeapRate and they also must know what to make of the new data as soon as they read it. Traders can also gain the much-needed advantage by using subscription services that offer real-time alerts. They must know how to use that data to predict price changes. Just ‘digesting’ key data is not enough. Traders must act right on that information before the competition.
Long term traders also must have access to the latest info and be able to act on it fast if necessary. Markets are increasingly volatile. Due to the impact of world events, prices can soar or plummet in a matter of hours. In other words, following financial news is a must, but still not enough.
Great traders always make sure to stay up to date on business, economic, and political affairs–both local and global. A good trader must keep their eyes open to social and environmental changes as they can shake up the markets. But, it’s important to differentiate between snap-judgements and fast decisions grounded in facts.
Navigating the Markets
A trader needs to move fast and think even faster in order to successfully enter and exit a trading position over a short period. To ride the tides of volatile markets, one needs skills akin to those of a pro surfer. You need (almost) impeccable instinct and nerves of steel. But, all those traits must stem from a solid body of knowledge.
Today, traders have access to tools which their predecessors couldn’t even conceive. Speed in finance trading is of even greater importance now than it was before. The fact that nanoseconds can make it or break it is a seismic gamechanger. But, swift action is still nothing if it’s not backed up by honed instinct, experience, and knowledge.